Startup Risk Assessment: Going Meta for Smartraprenuers

by Patrick Magee, founder of BrainDance Software and Author of "Brain Dancing"

Steve Blank says a lot of wise things about starting a business. One of the most important is this:
A startup is an entity in search of a viable business model
Forget about business plans, sales teams, factories, web server farms, accounting systems. None of it matters until you have conducted an information search.

This is an information problem, so the principles I spelled out in Chapter 6 of Brain Dancing, “Going Meta”, apply. The most important of which is this:

You need to be able to conduct a high level scan over as broad an area as possible, noting areas of promise as you go, while maintaining the discipline necessary not to dive in until your high level scan is complete.
The metaphor I used in my book was as follows: imagine a very large lake such as Lake Washington. You have reason to believe there is a treasure somewhere in the lake. What is the best way to find the treasure?

Many people approach this problem in life by grabbing their swim trunks and heading to the nearest beach for a swim. Smartraprenuers align their approach with the following 3 guidelines:

  1. You have to set a time limit on your high level scan
  2. You should use the best technology available to you when conducting the scan in order to cover the broadest area possible during the time allotted.
  3. You need the best radar possible.
The time limit depends on your situation so I will focus on the other two. Today, the equivalent of using a helicopter with advanced radar to circumnavigate the lake is to use electronic polling with landing pages that track the effectiveness of your experiments. If you have access to a qualified emailing list, MailChimp is your friend if you don’t know the recipients personally. Otherwise, you can buy hundreds of ad impressions on Facebook for $10, do a very targeted Google adwords campaign for $10 per day, or use a variety of techniques with Twitter to reach out to people for no cost at all.

The 2nd principle from “Going Meta” is this:

In every field there are usually a few people that are orders of magnitude better than everyone else.
Chances are the masters in the problem space you are focusing on know exactly what you need to know, but they are often hard to reach. Twitter is by far the most efficient means I’ve ever found for locating “masters”. The book, “Power Twitter 3.0” does a great job explaining how to leverage this approach. More information on this is provided on my “Startup Road Map”. The basic idea is to find tools that will:
  1. Find the most valuable keywords in your market.
  2. Find the most influential people in your market using those keywords

From the point of view that starting a business: finding a viable business model, is an information problem, you can assess the risk of starting your business using the following table:

Just posted this Startup Risk Calculator to help you assess overall risk based on the factors in the following table.

Market Testability If you can use the Smartraprenuer strategy above to test your ideas before you build anything, select 1 for the “Testability” metric.
Market Stage It is far easier to succeed in an established market than to create a new one. You can reduce risk by being a fast nimble follower in a market where things have changed faster than the established leaders can react.
Customer Pain Level There are some things companies spend money on because they have to. In these cases, the customer has already budgeted for your product category which is far easier to sell than something they have never spent money on before.
Months to MNCCF Months to Maximum Negative Cumulative Cash Flow is a key metric to track at any stage. Do you have a financial model for tracking your cash flow? If so, it needs to give you the answer to this question on an ongoing basis: Given our project cash flows, what is the maximum cumulative cash outflow our startup can afford before the lights go out? If that number is less than 36 months, your risk goes up.
Market Breadth It takes an order of magnitude more capital (i.e. time and money) to go after a horizontal market. The more you can narrow your niche to a specific group of people with enough money to spend on your products the better your chances.
Competitive advantage Where the tire meets the road with Smartraprenuership. How can you test an idea before you have even started building it without giving away your great ideas? I struggled with this a lot. My best advice to date is this: if you are worried about this, you risk goes way up. This is fine if you are already funded. If you are starting on a shoestring however, it is probably best to avoid businesses where the fear of being ripped off deprives you from being able to gather market intelligence, build initial customer relationships, and most importantly, refine your product idea through dialog.
Strategic Partner Your risk goes way down if you can find a business that is already successful, and find a niche in their market they aren’t able to serve. If the partner gets calls or emails from customers that they can’t handle and is willing to refer that business to you, you are on your way. There are other levels of partnership. The important idea is to look for ways to create win-win relationships with companies that already have traction in your market.
Cash Cow Time and money. These are Smartraprenuers most precious resources. Ideas are easy. Well-formed ideas are not. If you are just starting out with tons of ideas but limited time and money, look for a way to create an initial product in your market that will provide a steady stream of cash while you work on the bigger well-formed ideas.
Established Customer Channel “Dig your well before you are thirsty” - Harvey McKay. If you have plans to start a business in a given market, start immediately building a communication channel with that community. You can do this by blogging, clever Twittering or just old fashioned networking. Use this time to develop a deep understanding of your prospective customers needs and what keywords they respond to in your communications.

There are two kinds of entrepreneurs. Those with money, and those with no money but lots of ideas. If you are in the 2nd group, you need to focus on what works above all else. You need to believe strongly that you have a great product, but until you have enough money, it is best not to violate the principles of Smartraprenuership: test early and iterate fast until you have located the buried treasure, then, and only then do you swing for the fences.

Note: these ideas are my own, but the emphasis on testing early and iterating fast was inspired in part from the pioneering work of Eric Reis with Lean Startup, which is a trademark he owns.

Related reading:
50 Habits That Prove You Were Born to Be an Entrepreneur, by Jayson Demers, via Entrepreneur Magazine
What Nobody Tells You About Being an Entrepreneur, by Lolly Daskal, via Inc.
I don't agree with everything in the article, but Lolly hits home on most of them especially this one:

"But those with the heart of an entrepreneur will always go through life making more opportunities than they find. They will overcome more challenges than they ever thought they'd be capable of and--above all--they never confuse a defeat with a final defeat." -Lolly Daskal

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